Turning Point? The minimum wage in 2014 and beyond

Published on Jobs, Skills and Pay

With the National Minimum Wage (NMW) rising on October 1st, this briefing note provides some background by setting out the evolution of the wage since its introduction in April 1999. It looks at the rate’s real value over the intervening period, and its relationship with median pay. It also considers the number of people affected by the NMW and the number for whom minimum wages are becoming a semi-permanent feature. Finally, it compares a range of scenarios for growth in the NMW over the course of the next parliament.

While there is a separate debate on the merit of political interventions in a process that is overseen by the independent Low Pay Commission we can, by way of context, consider some plausible ‘scenarios’ for the NMW over the coming years:

  • An inflation link, where the NMW only rises in line with the OBR’s projection for CPI inflation in every year from October 2015. Given recent falls and the strong employment picture, this is taken to be very much a worst-case scenario;
  • A return to the pre-crisis real-terms peak (as measured by CPI) over the course of the parliament (which means by October 2019);
  • An earnings link, where the April 2015 ‘bite’ of the NMW relative to our projections for median pay (which are based in turn on the Bank of England’s and the OBR’s projections for average pay) is held constant over the period;
  • A return to business as usual, with the NMW rising from October 2015 onwards in line with the annual rate of growth recorded during the pre-crisis years. Specifically, it is the real-terms rate of growth (in order to control for differences in inflation before and after the crisis) recorded between October 2001 and October 2007. The ‘bedding in’ period prior to October 2001 is removed, on the basis that it was atypical. Similarly, the downturn years are removed on the basis that we experience a return to a strongly performing labour market;
  • An implausible, but revealing what if? scenario in which the real-terms growth recorded between October 2001 and October 2007 continued uninterrupted by any economic downturn.